SEC Adopted Dealer Rules That Reached Crypto Liquidity Providers

The U.S. Securities and Exchange Commission adopted two rules on February 6, 2024 that expanded when securities-market liquidity providers would be treated as dealers, bringing some proprietary traders and crypto-market participants within a registration analysis traditionally associated with intermediaries serving customers.

The Commission approved Exchange Act Rules 3a5-4 and 3a44-2 by a 3–2 vote. Market participants covered by the rules would, absent an exception or exemption, have to register with the SEC, join a self-regulatory organization and comply with applicable federal securities laws and other regulatory requirements.

Although reform of the U.S. Treasury market was a principal institutional motivation, the adopted text did not exclude crypto asset securities. That made the decision important for digital-asset markets even though it neither classified any particular token as a security nor declared every decentralized-finance participant to be a dealer.

An activity-based test for dealing

The rules further defined when buying and selling securities for one’s own account occurred “as a part of a regular business.” One factor covered a regular pattern of providing liquidity by expressing trading interest at or near the best available prices on both sides of the market for the same security, where that interest was accessible to other participants.

A second factor covered firms earning revenue primarily by capturing bid-ask spreads or incentives offered by trading venues for supplying liquidity. The rule excluded a person controlling less than $50 million in total assets, registered investment companies, central banks, sovereign entities and specified international financial institutions.

That $50 million provision had an important limitation: the adopting release said it was an exclusion from these new activity-based rules, not a universal exemption from the Exchange Act’s existing dealer definition. Courts and prior SEC interpretations could still inform whether a person outside the new tests was acting as a dealer.

For covered firms, registration potentially meant capital, recordkeeping, reporting, operational-integrity and supervisory obligations. The SEC argued that applying those requirements to significant unregistered liquidity providers would improve oversight, resilience and competitive consistency with already registered dealers.

Why crypto and automated market makers were implicated

The adopting release stated that the dealer framework depended on the trading activity performed rather than the technology or type of security involved. It specifically said persons using so-called automated market makers while buying and selling securities for their own account had to assess whether they met the dealer tests.

The qualification “securities” was decisive. Application to a crypto transaction first depended on whether the relevant asset was a security under federal law. The February 6 action did not answer that threshold question across the crypto market, leaving projects and liquidity providers to confront both classification uncertainty and the new dealer analysis.

It was also unclear how the framework would map onto decentralized systems. An automated market maker may be software, while liquidity can be supplied by developers, governance participants, interfaces, organizations or individual pool depositors with materially different roles. The rule did not establish that a software protocol itself could complete dealer registration or identify one universally responsible party for every decentralized arrangement.

Commissioner Hester Peirce’s contemporaneous dissent focused on that gap. She argued that the criteria were too broad and asked how a software protocol could register, who would carry the obligation and whether crypto-focused applicants could realistically complete registration through the SEC, self-regulatory organizations and related institutions.

What was known on February 6

The SEC said the rules would become effective 60 days after publication in the Federal Register, with compliance required one year after the effective date. Because publication had not yet occurred on February 6, those calendar dates were not fixed in the event-day record.

The defensible conclusion was therefore narrower than an immediate change in operating status: the Commission had adopted an activity-based route into dealer regulation that expressly declined to carve out crypto asset securities. Its practical reach into decentralized markets remained uncertain, dependent on specific conduct, available exclusions and the unresolved legal status of the assets being traded.